The price tag is “clearly above expectations,” said Bernd
Maurer, a Vienna-based analyst at Raiffeisen Centrobank.

Telekom Austria fell the most in more than a year in Vienna
trading. The auction, the biggest in Austria’s history, was
delayed by a year after Hutchison agreed to buy mobile operator
Orange Austria from Mid Europa Partners LLP in 2012. Three and
larger operators Telekom Austria and T-Mobile are the only
mobile-service providers in the country following the takeover.
No other company took part in yesterday’s competition, in which
the regulator was seeking a combined minimum of 526 million
euros from all suitors.

Telekom Austria dropped as much as 8.8 percent, the
steepest intraday decline since September 2012. It traded 4.9
percent lower at 5.97 euros as of 1:16 p.m. in Vienna. Deutsche
Telekom fell 0.9 percent in Frankfurt while Hutchison rose 1.7
percent at the close in Hong Kong.

‘Gigantic Challenge’

Six of the 28 frequency blocks offered are in the 800-megahertz spectrum, the main segment for larger-capacity long-term evolution technology, and Telekom Austria was allocated
four. LTE networks enable expanded broadband Web access in rural
areas while allowing urban customers to browse the Internet
faster and stream higher-quality videos.

Operators are likely to “gorge on frequencies because the
volume of data is growing so rapidly,” Telekom Austria Chief
Executive Officer Hannes Ametsreiter, said at a conference on
Oct. 8. “Videos are going to explode and this is posing a
gigantic challenge to the networks.”

Telekom Austria “rolled the dice” on a gamble to corner
the market, Usman Ghazi, a London-based analyst at Berenberg
Bank, wrote in a note to clients. A breakeven on this investment
in the long term “is not trivial,” he said.

New Debt

Telekom Austria will finance the acquisition, which has to
be paid within eight weeks, with existing cash and new debt, the
Vienna-based operator said in a statement. The company intends
to reduce liabilities via “operational cash flow.”

A capital increase to pay for the auction can be ruled out,
Ametsreiter told journalists in Vienna today. The company’s
credit ratings -- Telekom Austria holds a BBB at Standard &
Poor’s and a Baa1 at Moody’s -- are being discussed with the
agencies, the CEO said.

“Digesting a billion euros is not a bagatelle,”
Ametsreiter said.

The result of the auction is a “disaster for the
industry” because of high pricing, Jan Trionow, head of Three
Austria, said in a statement. “Compared to competitors, we
managed to minimize the financial damage to the company.”

Auction Criticism

Trionow was among industry executives who had criticized
the “combinatory clock auction” form of the competition
because of the potential cost. Operators weren’t allowed to
disclose whether they intended to take part, a prohibition
intended to prevent collusion.

“It’s not the auctioneer who determines the result,”
Georg Serentschy, who heads regulator RTR, said by telephone.
“If the market leader seizes 50 percent of all spectrum, he
shouldn’t expect others to just watch.”

Operators will lack the funds to build out their networks
as a result of the high spectrum prices, Andreas Bierwirth, T-Mobile Austria’s CEO, said in a statement.

“The fees are at the top end” of what was taken in
comparable European auctions, Bierwirth said. “The public
broadband subsidies for underdeveloped regions that have been
announced should be considerably raised.”

Quadrupled Usage

Hutchison completed its 1.3 billion-euro takeover of Orange
Austria in January. The deal included the sale of Orange’s
prepaid unit Yesss! to Telekom Austria for 390 million euros to
meet antitrust requirements.

Data usage more than quadrupled in the past three years,
the regulator said in its latest report on Austria’s
telecommunications market. At that rate, the figure may double
again by mid-2014, the regulator said. Smartphone ownership in
Austria exceeds figures in neighboring countries at 69 percent
of the population, compared to 43 percent in Switzerland and 29
percent in Germany, according to the Mobile Marketing
Association.

The additional auction revenue comes as an unexpected boon
to Austria’s state coffers in a year in which the government may
have to spend more than budgeted to prop up nationalized Hypo
Alpe-Adria-Bank International AG.

A sale of mobile frequencies for UMTS-technology phones in
2000 raised 11.4 billion Austrian shillings ($1.13 billion),
causing disappointment among Austria’s politicians who thought
it could have brought in twice that amount. German operators
paid 50.5 billion euros that year, marking a high point in a
series of auctions during the dot-com boom.

Telekom Austria sold 300 million euros in bonds after Chief
Financial Officer Hans Tschuden said in May that gaining mobile
spectrum at auction might lead to financing needs. It also sold
a 600 million-euro hybrid bond earlier this year.